People often think of “asset protection” as the hiding of assets in off-shore accounts, forming “dummy” corporations and operating in the shadows. Asset protection is a much broader legal concept that is applicable and advisable for literally every owner of real estate as well as for owners of significant other types of assets. This article is intended for owners of investment property, but asset protection planning takes many forms and should be something everyone of even modest means should contemplate. Aside from the risks of owning real estate, there are other financial liabilities people should plan for such as medical expensed, nursing home care and disability.

Asset protection planning is, essentially, the legal organization of assets to provide maximum protection against losses and unwanted transfers. An asset protection plan makes your property less vulnerable to aggressive creditors and less susceptible to unwanted transfers that can be compelled by unexpected events or even death. A good asset protection plan includes sound estate planning and is intended to provide a heightened level of security over your affairs in a global sense.

In today’s litigious world, owners of real estate, in particular, are fighting an increasingly intense war against claims based on lead paint, asbestos, radon, low level radiation, ground contamination, terrorist attacks, civil disruption, and now, even the presence of molds are generating massive losses because of relentless litigation and
remediation costs. Yes, insurance helps and sometimes saves the day. But increasingly, the insurance companies are successfully weaving into their policies exclusions from some of the very things that pose the highest potential risks to your financial well being.

I challenge you to dig out your property insurance policy and read the section on “exclusions.” Many of you will be shocked and properly alarmed to see how vulnerable your assets really are.

You can fight back! Do not allow yourself, and all of those assets that you worked all of your life to achieve, be an easy target. Do not be the “low hanging fruit’ for some aggressive personal injury law firm. Engage a competent attorney to conduct a comprehensive review of all of your business affairs, including your business and personal assets. Think of it in the same way as you do about going to your doctor for a physical. Do not wait until you are being sued or are in financial trouble. In many cases, it is too late at that point to employ some of the most effective asset planning techniques.

Asset planning is not a mysterious process but is practiced widely today by many. It can include such fundamentally simple things as holding assets in one or more entities that provide protective veils for it owners. Obvious examples include forming a limit liability company or a corporation instead of owning the real estate individually or as a general partnership. This is nothing new but it is truly amazing how many owners have failed to take even such elementary protective measures.

Owners of multiple assets and significant wealth must employ more complex and sophisticated asset planning techniques. Such include layers of ownership entities, carefully planned transfers, coordinated financings, multiple bank accounts in various institutions, succession planning and carefully coordinated estate planning. Estate planning will include not only an updated will but can include the placement of assets and other wealth in various types of domestic and foreign trusts, including medicaid
trusts.

Asset protection planning, then, should be a “big picture” examination of all of your assets and affairs. The examination should then lead to a comprehensive plan that provides a coordinated and logical approach to providing (a) a protective “shield” around you and your family against risks and liabilities and (b) a logical and effective approach to the distribution and preservation of assets in the event of your passing. Do not wait until you are faced with financial catastrophe. Call and set an appointment with your attorney today. The cost of asset protection planning is nothing compared to what you could lose by failing to protect yourself and your family.

“Asset Protection,” as discussed here, means devising legal methods that will help protect you against lawsuits, claims and judgments arising from the ownership and operation of rental property.

Today’s insurance policies include a growing list of “exclusions” intended to reduce the items for which insurance companies must provide coverage. Accordingly, as the list of exclusions grows (lead paint, mold, asbestos, etc), property owners are increasingly at risk of suffering staggering losses from lawsuits.

“Litigation Lottery” is a term often used to describe the explosion of litigation in America today. Newspapers and television bombard us with news of huge judgments in favor of people who seem to have caused their own injuries. Our juries have failed us as they give our money away like Lotto proceeds!

Asset Protection is a long-term strategy of “lawsuit avoidance” as well as protection against judgment creditors. Asset Protection requires advance planning and careful implementation with the help of your attorney and tax advisor. It is critical that you implement asset protection strategies before trouble strikes. A good asset protection plan will discourage suits against you in the first place, and then even if you are sued, it will help protect your assets from seizure.

So what can an embattled landlord do to hold off the predators? Plenty! But one size does not fill all. Unlike real estate closings or other such legal work, asset protection requires individualized legal planning.

Situations differ from one landlord to the next. Some landlords have just a few rental units and depend on a full time job for their primary support. This person’s assets might include a house, car, savings and other income. Another person may be a full-time landlord and depend fully on his rental property for income and support. Some landlords may do much of their own work, while others may hire management companies or contractors.

Each of the situations above require different approaches to asset protection. The object is to:

Asset protection strategies usually involve a combination of things including the creation of limited liability companies or corporations, transfer of rental properties to various entities you own, transfer of personal assets, “equity stripping” of your rental properties, handling operations through your own management corporation, becoming an employee of your corporation, transfers to out-of-state companies, and similar techniques designed to discourage and frustrate the litigation predators. A cost-effective and practical plan is within everyone’s reach.

Lately, asset protection has become the subject of popular books and newsletters. Asset protection strategies have been sugar-coated, over-simplified, described as “bullet-proof” and otherwise made to sound easy. Let me tell you that when you are sued for everything you ever worked for, it will shake you to your bones. You will pray that your asset protection plan works and that you did not scrimp on it. Effective asset protection requires advance planning and careful implementation.

When REO buyers bring in contracts that they have already signed for REO properties, it is usually late for changes. Typically the “contract” consists of the standard form of contract used locally plus some onerous addendum that the REO seller insists upon.

These one-sided REO contract addendums often provide for (1) a ridiculously short closing schedule which, if not met, requires daily penalty payments, even if the delay is caused by the seller or the seller’s defective title (2) no title documents provided by the REO seller or buyer is required to use a specified title company (with some relationship to lender, casting doubt on marketable title), (3) buyer pays all expenses, even that of the seller, (4) right of attorney approval (after signing) is waived, and (5) seller does not have to turn the utilities on for any inspections, but property is sold, of course, “as-is.” These are just a few of the many treacherous provisions found in typical REO contract addendums.

The most important advice I can give a buyer of an REO property is to stay calm (even if the broker tells you that you have two hours to look at the property and put in an offer), think through each provision of the contract (especially any contract addendum) and call your attorney before you sign. Trying to amend the contract and addendum later is next to impossible. So discuss the key points of the deal and the closing process with your attorney before signing your final offer.

Have a realistic closing schedule (especially if mortgage financing is involved)
Make sure that the seller will provide the usual and customary title documents and pay the typical seller expenses (such as in New York where sellers have to pay a transfer tax)
Provide that you are free to choose your own title company to examine title and issue a title insurance policy
Make it clear that the utilities will be on for your inspection (especially in the cold climate areas where there can be cracked pipes in the walls, etc) and that you have a reasonable amount of time to make the inspection, cancel the contract, if necessary, and receive back your deposit
Cross out provisions where you are asked to give up your statutory rights and protections

In Part 1, we talked about some of the basic aspects of choosing the right contract forms and the fundamental information to be included. Here I will give you some brief tips on other portions of a good residential real estate contract.

With increasing frequency I am seeing buyers asking for a “seller concession” and the latest form of contract even has a section that you can just fill in for a seller concession in some specific amount of money. This assists buyers who are tight on cash and this money is used toward your costs at closing. The seller often wants the price increased by the amount of the seller concession, but it still can help by reducing the cash needed to close. Keep in mind, however, many mortgage lenders will not permit a concession that exceeds 3% of the purchase price (but most FHA loan programs allow up to 6%). So check with your lender ahead of time if possible.

A recurring problem that I see in recent transactions is insufficient time allowed in the contract for obtaining a mortgage commitment letter. Locally, lenders are taking about four weeks from when you actually submit your application. But if you only allow four weeks from the date you sign the contract, you will actually end up with only about three weeks since you will lose about a week while the seller considers your offer, possibly makes a counter-offer, etc. So I advise you to insert a date in the mortgage contingency clause allowing about five weeks from the date you make your offer. Keep in mind the importance of meeting the mortgage commitment deadline in the contract because the seller can cancel the contract if you do not have your commitment on time!

When establishing a closing date for insertion in the contract, you should allow a minimum of two weeks (three weeks would be better) after the commitment date to close. It takes at least that long between when you receive the mortgage commitment and when the lender gives you a “clear to close.” Remember the commitment just says that the bank plans on making you the loan, but you will still have some documents to obtain for them and then the file has to go to “underwriting” for a final clearance. Some of the first time homebuyer loan programs take a couple of weeks longer, such as mortgages made by SONYMA.

There is a section in the MCBA contract for making the contract subject to your attorney’s approval. This is critical and you must not forget to check that box so that your attorney can help you if you make a serious error in filling out the contract forms. There is a small space where you insert the amount of time allowed for attorney approval – insert at least 7 days for this approval.

You will also need to decide on a few other contingencies. You should make the deal contingent on a satisfactory inspection by a professional inspector. Allow at least 7 days to obtain this inspection and if there are problems found that you find unsatisfactory, you must promptly notify the seller in writing to preserve your rights to cancel the contract if such becomes necessary. Use the MCBA inspection addendum form and append it to the main contract form. Similarly, if the property has a septic system or well, use the MCBA addendum for well and septic inspection contingencies. If you have to sell a property that you now own before you can buy the new property, there is a MCBA addendum for that too and it is of critical importance.

I hope the tips in this article (and in Part 1) have been helpful. Remember, however, these articles are no substitute for consulting with your own attorney, which I strongly encourage you to do. Everyone has somewhat unique circumstances that will effect the terms of your contract. I would be happy to help you when you decide to proceed with a purchase offer.

You would not believe the common mistakes that I see buyers and sellers make when they sign contracts. Reading this article will help you sidestep some of these mistakes. After you have finally found the real estate you want to make an offer on, you have to make that offer on a form of contract.

Typically you are working with a qualified real estate agent, but not always. The “form” of the contract can make all the difference in the world to your outcome. Do not be tempted to download some form from the internet because this is a complicated matter and subject to local real estate practice, understandings and practice. Practices differ substantially just within a few counties. Make sure that your agent or your attorney uses the most recent forms produced by a collaboration between the Real Estate Board and the local County Bar Association.

You may have a form contract that says, for example, that seller shall provide a survey map and, as closing approaches, you may receive a four year old survey map. The Seller may be complying with the contract, but you may end up having to pay about $350 or more to get an updated survey. If you use the forms I mentioned above, the contract will require the seller to provide a survey dated after the date of the contract, which is what your mortgage lender and title company will want. This is just an example of the many differences you may find in using different forms of contracts.

The MCBA forms include the primary contract form plus addenda for such things as property inspections, well and septic inspections, lead disclosures, sale contingencies (when you have to sell your current home to buy the next one), and other similar important conditions to your offer. These will contain terms and conditions that all the local real estate attorneys know how to interpret and, thus, there will be far fewer problems and disagreements when using them.

The first thing you will need to add to the form of contract is the correct full names of those who will be taking title. Do not use “Jim” when your name is “James” and the names should match your names as they appear on yur driver’s licenses (which you will have to produce at the closing).

Some of this may be obvious, but next you will need the full proper address of the real estate and do not forget, if it includes an extra lot, be sure to include that in the offer. You would be amazed at some of the things that are not accurately included in contracts, which can lead to extremely serious problems.

If the “listing” printout is available, check it over carefully and include in the contract the things that the seller has said is included in the deal (refrigerator, stove, etc). Accrurate descriptions of the very things that you are offering to buy are fundamental to a good contract. Other items to be careful to include would be items the seller has offered to complete (for example, finish exterior painting, opening the pool prior to closing, etc.

Remember that in New York, real estate contracts are subject to the General Obligations Law, which requires all terms of a real estate deal to be in writing. If it is not in the contract, you may be out of luck despite what may have been promised verbally.